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Finance Section 4 Quick Quizzes

Terms in this set (27)

16 What are the differences between flexible and restrictive short-term financial policies?
Flexible: large amounts of cash and marketable securities, high liquidity
Restrictive: low cash and marketable security balance, low liquidity
16 What factors do we need to consider when choosing a financial policy?
Cash reserves
Maturity hedging
Relative interest rates
16 What factors go into determining a cash budget, and why is it valuable?
Records estimates of cash receipts (cash in) and disbursements (cash out)
Primary tool in short-run financial planning, helps manager explore the need for short-term borrowing
17 What is the difference between disbursement float and collection float?
Disbursement floats decrease the firm's book balance (book balance < available balance), Collection floats increase the book balance (available balance < book balance)
17 What is credit analysis and why is it important?
The process of determining the probability of customers paying or not ; important because it is used to determine if the creditor is going to be trustworthy or not
17 What are the two main categories of inventory costs?
- Carrying costs: storage and tracking - Shortage costs: restocking costs, lost sales and customers
17 What components are required to determine the economic order quantity?
Safety stocks (minimum level of inventory kept on hand) and reorder points (inventory level at which you place an order to account for delivery time)
18 What does an exchange rate tell us?
The price of one country's currency within another country
Direct quotation: in terms of US dollars
Indirect quotation: the amount of foreign currency needed for one US dollar
18 What is triangle arbitrage?
Currency moves through three exchange rates with the US dollar as the common denominator
18 What is absolute purchasing power parity?
Price of an item is the same regardless of the currency used to purchase it or where it is selling
18 This is relative purchasing power parity?
Tells what determines the change in the exchange rate over time
18 What is covered interest arbitrage?
Capitalizing on the interest rate differential between two countries while covering exchange rate risk with a forward contract
18 What is interest rate parity?
Investors should expect to earn the same return on similar-risk securities in all countries
18 What is the difference between short run interest rate exposure and long run interest rate exposure and how can you hedge each type?
Short-run: risk from day to day fluctuations in exchange rates with contracts that buy and sell goods at fixed prices ... hedge risk by entering into a forward agreement to guarantee the exchange rate
Long-run: come run unanticipated changes in relative economic conditions ... more difficult to hedge, but manages risk by matching long run inflows and outflows in the currency
18 What is political risk and what types of businesses face the greatest risk?
changes in value due to political actions in the foreign country
Natural resource development such as oil would be effected by the risk
15 What is venture capital and what types of firms receive it? NEED ANSWER
Private financing for new, high risk businesses in exchange for stock
Types of firms that receive it???
15 What are some of the important services provided by underwriters?
Formulate method to issue securities
Price the securities
Sell the securities
15 What type of underwriting is the most common in the United States and how does it work?
Firm Commitment Underwriting
Issuer sells entire issue to underwriting syndicate, Syndicate resells issue to the public, Underwriter makes $ on the spread when the stock is sold
15 What is IPO underpricing and why might it persist? NEED ANSWER
When the initial price of the stock is below what the market demand is
It persists because...
15 What are some of the costs associated with issuing securities? NEED ANSWER
...
15 What are some of the characteristics of private placement debt?
Private placements
Easier to negotiate
Lower costs
15 What is shelf registration?
Permits the firm to register a large issue with the SEC and sells it in small portions
Reduces flotation costs
Allows more flexibility
14 What are the different types of cash dividends?
Regular: cash payments directly to stockholders
Extra: extra amount paid out that may not be repeated in the future
Special: similar to extra dividends
Liquidating: some or all of the business has been sold
14 How is a dividend paid?
Declaration date: the Board declares the dividend
Ex-dividend date: two days before date of record, dividends bought on or after this date will not receive upcoming payment
Date of record: holders are selected to receive payment
Date of payment: checks are mailed
14 What is the clientele effect?
Argument that stocks attract particular groups based on dividend yield and the resulting tax effects
14 What are stock dividends and how do they differ from cash dividends?
Stock dividends distribute additional shares of stock, instead of cash, and increases the number of outstanding shares
14 How are share repurchases an alternative to dividends, and why might investors prefer them?
- Repurchasing returns cash from the firm to the stockholders
- Allows investors to decide if they want a current cash flow
- They are only taxed if they choose to sell or reap a capital gain on the sale
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